Speech at St Petersburg International Economic Forum Plenary Session

June 18, 2010

12:00

St Petersburg

President of Russia Dmitry Medvedev: Good afternoon, ladies and gentlemen,

Good afternoon, colleagues and friends,

It gives me great pleasure to welcome you to the St Petersburg International Economic Forum. Of course we are very happy to see the upsurge in interest in our forum this year. The reasons for this are clear and it is probably not by chance that this is happening. I recall that last year, when I exchanged views with my colleagues, presidents and prime ministers of other countries, and with company executives, the mood was somewhat subdued, but today, although we still face problems, we do see an improvement in the general mood.

The presence here of prominent politicians, entrepreneurs, and experts from various countries is a sign not just of this forum’s growing influence as an event, but also of increasing interest in our country, in Russia, in the policy we are implementing – a policy that can be summed up by one short word – modernisation. Of course this makes me very happy to see.

A year has passed since the last time we met. But it is not simply a year that has gone by. Something bigger has happened. We have changed.

I want to tell you more about the changes taking place today in Russia, and also share with you some news on our decisions and our future plans. I hope this will be good news for you.

We have changed and the entire world has changed. The world we see around us today looks nothing like the world of five years ago or even one year ago. Seemingly unshakeable pillars have collapsed, and bubbles creating an illusion of prosperity have burst. Myths with the appearance of reality have vanished.

Since the crisis in the financial sector began around $1.8 trillion has been written off – a sum greater than the GDP of most of the euro zone countries. This money written off is double the amount of the anti-crisis fund recently established by the European Union. This is probably not the end yet, as financial institutions continue to record losses.

The world has been hit by a wave of problems, by hundreds and thousands of corporate defaults. Around 250 banks have gone through financial cleanup procedures over the last two years in the USA, while over the five years running up to 2008 this number came to no more than a dozen.

Whether we like it or not, liberalism in the world has given way to a moderate, and on occasions not at all moderate, protectionism. High ratings no longer guarantee investors high returns on their investments. For the first time in many years the call is coming through loud and clear for structural reform not so much in the developing as in the developed countries. Not so long ago it would have sounded strange to hear talk of sovereign debt and budget deficits flooding over in the world’s most advanced economies, but today this is the reality that we have become used to.

This new reality has brought with it change to our economic models, financial architecture, technology and social institutions. Flexibility and adaptability have become much more popular words today than stability and predictability. Obviously, not everyone is overjoyed by this situation. Intensive debate is underway, including in the European Union. But this change will continue. The only thing that we can say for sure in this current of change is that there is no going back to the old order and the old development models.

For Russia this situation is both a challenge and an opportunity. We really are living in a unique time and we need to seize this chance to build a modern, strong and prosperous Russia, a Russia that will be one of the co-founders of the new global economic order and a full participant in the post-crisis world’s collective political leadership.

Our goal over the coming decades is to turn Russia into a prosperous country with high living standards built not so much on raw materials as on intellectual resources, an innovative economy producing unique knowledge and exporting new technology and innovative products. We will make Russia a country attracting people from all around the world to come here to realise their dreams and take up the great opportunities for success and self-realisation that Russia will offer all who are ready to accept this challenge and love Russia as their new or second home.

This is the goal our modernisation pursues, and I am totally confident that these are realistic goals fully within our reach. What we need above all to make these goals reality is a ‘smart policy’ that will allow us to make the most of our opportunities and specific advantages, while at the same time building the mechanisms for continual self-improvement and development. What kind of things does such a policy involve? Let me name five of its essential components.

First, Russia today has good macroeconomic conditions for modernisation. The global crisis highlights the weaknesses of our primarily raw materials-based economy, of course, but at the same time, our country also has clear advantages that we must put to good use in our development.

In the second half of last year we succeeded in stabilising the economy after a sharp fall. Now a gradual recovery is underway. The economy contracted by almost 11 percent in the second quarter of last year, but the drop in the fourth quarter was much smaller – around four percent. Very significantly, we succeeded in starting this year with some growth in our economy. The recovery is not proceeding as fast as we would like, perhaps, but we have already begun posting some decent figures. According to our current statistics, economic growth stands at four percent over the first five months of the year. We now need to build on these results. Some countries have demonstrated a very rapid recovery, and in this sense we have examples to learn from.

Growing household savings have helped to support the banking sector and enabled more rapid economic stabilisation. Personal deposits alone rose by more than a quarter last year.

We have no problems with our sovereign debt, which is minimal. Our gold and currency reserves are on the rise once more, and their current level – around $460 billion – is a perfectly decent figure, and higher, in any case, than the total we had at the end of 2008.

After implementing a series of unprecedented economic support measures we are now moving over to a more cautious and balanced budget policy. The main thing is to keep the budget deficit under control. We are not happy with this deficit, of course, but it is being kept within reasonable limits, is not hampering our development efforts, and will come down with each passing year. By next year, the federal budget deficit should come to around 4 percent of GDP, and by 2012, will be down to 3 percent. This assumes that events will develop according to our forecasts, of course. We do realise that many different factors can affect our economies and the situation in the global economy in general.

Inflation. The high inflation level we have had over these last 20 years has been one of our biggest problems. Inflation slowed down considerably in 2009, dropping to around 9 percent. Of course, this was not just the result of our efforts but was also due to the economy’s overall contraction. This year, inflation continues to fall and now stands at around 6 percent per annum. If we manage to sustain this trend we will have the lowest inflation figures in Russia over the last two decades, that is, ever since Russia began its development as a market economy.

In an effort to avoid an excessively high budget deficit and potential debt crisis many countries are raising taxes or cutting back social programmes and benefits. These are understandable steps.

But our position is that we are duty-bound to fulfil all of our social obligations. This is due to the situation in which our social sector has found itself in over these last years. But we must ensure at the same time that our efforts to help the most vulnerable groups of our population do not hamper progress. We have the possibility of acting without having to raise taxes over and above the decisions already taken in this area. What’s more, next year we will start offering additional incentives to innovation companies. If the general climate for global and Russian economic recovery stays favourable we will return soon to the question of an overall reduction in the tax burden on businesses. As I say, we will do this if the situation stays favourable.

Second, our country needs a budget policy that encourages structural change in the economy. We do not have such a lot of money in the budget at the moment for financing structural transformation, but we need to start using the money that we do have more effectively and ensure it produces greater results.

We will therefore start making some serious changes to our budget policy next year. We will refocus the budget on carrying out specific programmes and putting greater emphasis on our main development priorities. We have made the difficult but important decision to stop financing public-sector institutions according on non-performance based criteria, and will be financing instead changes and improvements, new projects, and resolution of specific tasks. The budget will allocate funding for developing e-government, for example, increasing access to broadband internet, making grants to young scientists and promising research, and making the economy and the housing and utilities sector more energy efficient.

Third, investment activity. Active investment is one of the keys to achieving innovative development and successfully modernising our economy. Russia needs a real investment boom.

Offering a comfortable environment for investors is one of our biggest tasks and we have made this one of our top priorities today.

I recently changed the rules concerning law enforcement agencies’ work with regard to business. The law now limits possibilities for arresting businesspeople in connection with investigations into economic crimes. Clearer rules have been set for inspections of businesses, and they are subject to the prosecutors’ supervision. This does not mean, of course, that all problems have been solved, but we have anyway made specific and significant steps and we will continue our efforts in this direction. Further amendments will be needed to the criminal, criminal procedure and other laws, and I will propose them.

As far as improving the investment climate is concerned, I hope we are making progress here too. Since January 1 this year simplified procedures and increased possibilities have been in place for applying the zero rate to profit tax on dividends. I can announce now that starting next year Russia will completely abolish the capital gains tax for long-term direct investment. (Applause.) Thank you for your support.

This investment is absolutely essential for us to be able to modernise our economy, and we are ready to establish the institutions that will help to encourage this investment. I am hereby instructing the Government to examine the idea of setting up a special investment fund in which government funds will be complemented with private capital; say, we will try to attract 3 rubles of private investment for every one ruble of state money. The fund will work on finding strategic investors for projects and co-financing these projects. It will be completely transparent in its operation and work on the basis of market principles. I think we could carry this proposal out within a year.

In another area, we have simplified immigration rules for highly qualified foreign specialists. This decision has already been taken and I have already signed this law. These procedures will apply in particular to those taking part in big investment, scientific and high-technology projects. We are working on improving our visa procedures and I hope that many of the guests at this forum today will soon be able to make use of the new possibilities for pursuing their businesses and careers in Russia.

Fourth, we are acutely aware that one cannot build a modern economy by decree from above. No matter how many state-owned enterprises we might have modernisation will above all be achieved through the efforts of private business, and only in a competitive environment. The state’s job is to ensure a good business climate for Russian and foreign entrepreneurs, and a fair and honest competitive environment.

Our Nobel Prize-winning physicist Pyotr Kapitsa liked to say “People often think it’s he who picks the apple who’s done the main work, but in reality, it’s he who planted the apple tree who’s done the main work”. The state should not always try to pick the apples from the economy’s tree as there is always someone who would do that better and in a more efficient manner. The state should concentrate on its main job – helping to cultivate the apple orchard, creating the right soil and environment for the economy itself to grow and develop.

I am therefore making a five-fold cut to the list of strategic enterprises. The number of strategic joint stock companies is to drop from 208 to 41, and the number of federal unitary enterprises comes down from 230 to 159. I signed this executive order today. (Applause.)

Fifth, we know that international competition is a decisive incentive for our modernisation. We cannot hope to grow anything substantial in hothouse conditions. We therefore seek and are ready for competition.

Russia is long since ready to join the WTO and the OECD. The establishment of the Customs Union between Russia, Kazakhstan and Belarus, and our continued steps towards the Common Economic Space are also part of our conscious choice to work in a competitive environment. It is for this purpose that we are taking these steps. These endeavours do not contradict each other but, on the contrary, complement each other. We can be a member of the WTO and at the same time continue to develop our Customs Union and Common Economic Space with our close partners.

We know that competition can be very fierce, but we know too that this means we still have a lot of work to do to improve our state management system and encourage competitiveness not only in our economy but also in our state system, including by making Russian jurisdiction more competitive.

Our foreign economic policy also needs to be effective from the modernisation angle. Russian business success on global markets and tangible results in attracting investment, technology and projects to the Russian economy should be the main criteria for investment and economic activity in this area. Tomorrow I will hold a meeting of the Commission for Modernisation and Technological Development here in St Petersburg, at which we will discuss the details of what adjustments to make in our work with our foreign partners in order to achieve the maximum results.

Forum participants,

We have already set a firm course for our country’s economic modernisation.

The Commission for Economic Modernisation, which I took the head of almost a year ago, is promoting actively the priority areas of energy efficiency, outer space, nuclear energy, and medical and information technology. These are all very important areas for our country.

Albert Einstein once said “Everything should be made as simple as possible, but not simpler”. This will be our action mode. We have already begun carrying out dozens of specific projects in our priority areas. One example is the project to introduce and spread the use of advanced information and communications technology. We were among the first to launch wireless fourth-generation commercial networks, and we are continuing to move forward, expanding their coverage zones and data transfer speed. We have set ambitious goals for ourselves. They include increasing the number of internet users over the next few years to the highest level possible, perhaps to having 90 out of every 100 people in our country using the internet.

By 2015, Russia will complete in full its move over to digital TV broadcasting. By this time, 60 percent of users in our country will have broadband internet access. I think that the development of a national payments system and the development of the internet and electronic media will also make a big contribution to helping to speed up the pace of society’s modernisation.

Information technology is one of the key elements in developing democracy in general. The speed and quality of feedback between the authorities and society, greater technological possibilities for guaranteeing freedom of speech, and internet technology in operation of political and electoral systems are all important for developing our political structures and institutions.

In a number of cases we are changing our practices. We have decided to apply EU technical standards in Russia, for example. This took a while to settle, but in the end everyone agreed that it would be simpler to take this road than to spend a long time developing our own standards, though we will work on developing our own standards too. Universities are now establishing small innovative enterprises, and we are developing a system of national research universities. Starting next year we are completely abolishing the profit tax for organisations providing health and education services.

I am also instructing the Government to draw up a new programme for supporting Russian students and specialists studying abroad in the world’s leading research universities. This programme will strengthen our ties with global science and with the global education and innovation communities.

We place great importance on developing the Russian innovation centre in Skolkovo. I have already submitted to the State Duma a draft law establishing special legal provisions for this centre. A unique system for selecting, carrying out, commercialising and providing subsequent support for innovation projects will be used here. I hope this system will be a success. We will test its every aspect, from the legal aspects to the new principles for partnerships between the state, business and science, and then we will start to replicate it elsewhere.

Our support for innovation must not end with the centre in Skolkovo, of course. Starting next year we will introduce substantial tax breaks for all companies working in innovation fields. But there is also particular sense in developing the national innovation centre in Skolkovo. We think that if this project is effective and successful it will provide a good model for using elsewhere and replicating around the country.

In passing, I want to say a separate word of thanks to everyone who has already agreed to work with us in Skolkovo and joined the Supervisory Board. We will meet separately later and discuss our plans.

Colleagues,

We have also stepped up our efforts in developing an international financial centre in Russia.

Our interest in this project is obvious. If we want to succeed in our modernisation we need to make our national financial system developed and competitive at the global level. Developing our financial industry is thus a means to achieving our objectives as well as being one of our modernisation goals in itself.

Developing a financial centre in Moscow is something that could benefit the entire world. This is borne out by my contacts with the heads of major banks and financial institutions. We see our task as joining efforts with the world’s other big economies to improve the global financial system, reform the international financial organisations and set new standards for regulating financial markets.

Moscow is already the de facto financial and logistics centre for the whole of Russia. More than 90 percent of all cash flows and by far the greater part of freight and passenger flows come through Moscow before going onwards into the country or beyond its borders. This is a situation that creates both advantages and problems, quite big problems. But with every passing year the financial flows from various countries, including the CIS countries, are becoming increasingly concentrated in Moscow.

Establishing this centre would therefore be a logical stage in developing a powerful new regional financial market. We will soon discuss this matter with our partners in the Customs Union and the Eurasian Economic Community. I hope that development of financial centre in Moscow will help to strengthen the ruble’s position as a potential reserve currency. We have already moved from the general idea of using the ruble in settlements to working out the specific details of such transactions with our partners.

Overall, Russia’s financial system is sufficiently developed for us to be able to carry out these plans. Despite the crisis, the system had total assets of around $1 trillion at the end of last year. Moscow’s public financial market is already quite well developed, with shares and bonds from hundreds of issuers in circulation. Daily trading has already long since been in the billions of dollars. In terms of derivatives Moscow is now one of the world’s top ten markets. Our market is therefore very well covered already and the time is very much ripe to develop it further.

This will require amendments to the laws, of course, and this is something we discuss. I recently held a meeting on establishing a financial centre in Moscow. What we need above all are changes to the law to make a more convenient environment for carrying out operations on Russian trading floors, and a more comfortable tax regime for financial activity.

By the end of this year we will pass laws on consolidated financial reports, on regulating the activities of affiliates, on a central depositary, and on a national payments system.

We are currently completing work on establishing an International Consultative Council, which, I hope, will help to develop this financial centre. The heads of many largest international banks and financial companies have been invited to join this council. Some of them are here today. We will have the chance later today to discuss these plans further. I want to say a word of thanks to those who have already agreed to work in this consultative council.

We are pragmatic people of course and we realise what a long road we still have ahead of us to establish a truly competitive financial centre in Russia, but this is precisely why we are so determined to start working hard right now.

Dear friends,

We are truly modernising Russia. Change does take time, but you can rest assured we will keep moving forward. The main decisions have already been made and a substantial number of projects are already launched.

Russia understands the tasks ahead in its development, and it is changing, changing for itself and for the entire world.